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May 30, 2017

This published opinion addresses two recurring issues in California punitive damages law. Both issues involve the assessment of punitive damages against an employer for the misconduct of an employee.

Before getting into the issues, here’s a little background on the case: The defendant CRST, Inc. is a trucking company. One of its employees, Hector Contreras, was driving a CRST truck when he collided with plaintiffs Matthew and Michael Lennig. They sued Contreras and CRST, seeking compensatory and punitive damages. They based their punitive damages claim against CRST on the theory that CRST knew Contreras was an unfit employee and employed him anyway. California Civil Code section 3294 authorizes punitive damages against an employer who has advance knowledge of the unfitness of an employee and employs him with a conscious disregard of the rights or safety of others. CRST moved for summary adjudication on the punitive damages claim. When the trial court denied that motion, CRST petitioned the Court of Appeal (Second Appellate District, Division Four) for writ relief, raising the following two issues.

Issue #1: Can an employer defeat a punitive damages claim by stipulating that it is responsible for an employee’s negligence?
The California Supreme Court held in Diaz v. Carcamo that evidence of an employer’s alleged failure to train/supervise is not relevant in an action arising out of an employee’s conduct, where the employer admits the employee was in course and scope of employment. The Diaz court reasoned that once an employer has admitted responsibility for any negligence by its employee, there would be no point in allowing introduction of evidence about negligent supervision or training, because even without that evidence the employer will be fully responsible for whatever fault the jury may assign to the employee.

But what about the situation presented here, where the plaintiff is seeking punitive damages based on a failure to supervise? If the defendant admits that the employee was acting in the scope of the employment, does Diaz require the trial court to exclude all evidence of the employer’s training and supervision of the employee, thereby prohibiting the plaintiff from making its case for punitive damages? The Court of Appeal answered that question “no.” Thus, CRST could not defeat the punitive damages claim by agreeing that Contreras was acting in the course and scope of his employment at the time of the accident.

That holding effectively creates a punitive damages exception to Diaz. Evidence normally excluded under Diaz can be admitted to prove punitive damages. In such cases, the trial should probably be divided into three phases. In the first phase, the jury would decide the issues of liability and compensatory damages, without considering the evidence that is normally excluded under Diaz. In the second phase, the jury could hear that evidence and decide whether the employer acted with the requisite knowledge and conscious disregard of safety to support a punitive damages claim. In the third phase the jury would decide the amount of punitive damages, if any.

Issue #2: Does a supervisor who implements corporate policy, but does not create corporate policy, qualify as a managing agent?
We have blogged many times about California’s managing agent rule: Civil Code section 3294 provides that an employer cannot be liable for punitive damages based on the acts of a rogue employee; there must be evidence that an officer, director, or managing agent of the employer authorized or ratified the misconduct.

In this case, the court concluded that plaintiffs had created a triable issue of fact as to whether a supervisor at CRST had advance knowledge that Contreras was an unsafe driver. But the court concluded there was not a triable issue of fact as to whether that supervisor was a managing agent. The Court of Appeal emphasized that the title of “supervisor” does not make someone a managing agent. Nor does the fact that the supervisor manages a large number of employees and implements company policy. To qualify as a managing agent, a corporate employee has to have discretionary authority to create company policy. Those principles are all consistent with prior case law, but this opinion nicely synthesizes the rule.

Looking at the evidence in this case, the court concluded that the plaintiffs failed to present evidence that Contreras’ supervisor had any authority to create a company policy that contributed to the accident. Accordingly, the Court of Appeal concluded that the trial court should have granted CRST’s motion for summary adjudication on the issue of punitive damages.